Electronic trading systems and intraday non-linear dynamics : an examination of the FTSE 100 cash and futures returns

This paper focuses on dynamic interactions of equity prices among theoretically related assets. We explore the existence of intraday non-linearities in the FTSE 100 cash and futures indices. We test whether the introduction of the electronic trading systems in the London Stock Exchange in 1997 and in the London International Financial Futures and Options Exchange (LIFFE) in 1999 has eliminated the non-linear dynamic relationship in the FTSE 100 markets. We show that the introduction of the electronic trading systems in the FTSE 100 markets has increased the efficiency of the markets by enhancing the price discovery process, namely by facilitating the increase of the speed of adjustment of the futures and cash prices to departures of the mispricing error from its non-arbitrage band. Nevertheless, we conclude that the automation of the markets has not completely eliminated the non-linear properties of the FTSE 100 cash and futures return series. JEL Classification: G12, G14, G1

The term structure of currency hedge ratios

Many firms face product price risk in foreign currency, uncertain costs in home currency and exchange rate risk. If prices and exchange rates in different countries interact, natural hedges of foreign exchange risk might result. If the effectiveness of such hedges depends on the hedge horizon, they might affect a firm's usage of foreign exchange derivatives and lead to a term structure of optimal hedge ratios. We analyze this issue by deriving the variance minimizing hedge position in currency forward contracts of an exporting firm that is exposed to different risks. In an empirical study, we quantify the term structure of hedge ratios for a ' typical ' German firm that is exporting either to the United States, the United Kingdom or Japan. Based on cointegrated vector autoregressive models of prices, interest rates and exchange rates, we show that the hedge ratio decreases substantially with the hedge horizon, reaching values of one half or less for a ten-years horizon. Our findings can (partly) explain the severe underhedging of long-term exchange rate exposures that is frequently observed and have important implications for the design of risk management strategies. --corporate risk management,foreign exchange risk,hedging,cointegrated VAR model

Fractional Cointegration Analysis of Securitized Real Estate

This paper uses fractional cointegration analysis to examine whether long-run relations exist between securitized real estate returns and three sets of variables frequently used in the literature as the factors driving securitized real estate returns. That is, we examine whether such relationships are characterized by long memory (long-range dependence), short memory (short-range dependence), mean reversion (no long-run effects) or no mean reversion (no long-run equilibrium). The forecasting implications are also considered. Empirical analyses are conducted using data for the U.S., the U.K., and Australia. We find strong evidence of fractional cointegration between securitized real estate and the three sets of variables. Such relationships are mainly characterized by short memory although long memory is sometimes present. The use of fractional cointegration for forecasting purposes proves particularly useful since the start of the financial crisi

Do Bid-Ask Spreads Or Bid and Ask Depths Convey New Information First?

This paper investigates the order in which new information is first reflected in the market – through changes in spreads or through updated depths. We develop an error correction model of spreads and depths and estimate Gonzalo-Granger common factor components using two years of tick-by-tick quote data on all stocks in the Dow Jones Industrial Average. We show that indeed depths rather than spreads are first to impound new information that leads to new quote trends. Specifically, (bid and ask) depths convey information first in virtually every stock in both years, while spreads almost never convey information in 1998, and do so in only 8 out of 30 cases in 1995. Even in those 8 cases, the percentage of new information revealed by spreads ranges from 50 – 59% with the depths accounting for the rest. Our results have important implications for academic research on asymmetric information trading, for security market design, and for public policy.VECM, spreads, depths, information,

Real exhange rate misalignment in Hungary: a fractionally integrated=20 threshold model

This paper proposes an estimate of the Hungarian real exchange rate=20 misalignments using fractionally integrated threshold models (FI-STARMA and=20= FI-TARMA=20 processes). This allows us to simultaneously take into account two types of=20 persistence: a long memory behavior due to the influence of real factors and= a=20 nonlinear behavior where persistence is associated with regime-dependent eff= ects.=20 Our results suggest that the regime-switching is instantaneous since the=20 FI-TARMA process is adequate to describe the misalignment of the Hungarian=20 Currency.

A dynamic analysis of France's external trade

The purpose of the present paper is to review the sources of France's trade surplus in recent years and to attribute trade balance movements strictly to those determinants of trade flows suggested by economic theory. These determinants are price and/or cost developments, and demand in France and in the rest of the world. A primary objective of the paper is to analyse the dynamics of adjustment of trade flows to changes in competitiveness and in relative demand. To do so, a cointegration/error-correction model is applied to flows of both imports and exports, and the estimates of key elasticities obtained are instrumental in shedding light on this question.France trade balance; price competitiveness; export import; cointegration regression

A dynamic analysis of France's external trade. Determinants of merchandise imports and exports and their role in the trade surplus of the 1990s.

The purpose of the paper is to review the sources of France's trade surplus in recent years and to attribute trade balance movements strictly to those determinants of trade flows suggested by economic theory. The paper is organised as follows: after the introduction, section II reviews some salient characteristics of France's trade in recent years; section III discusses an accounting decomposition of movements in the non-energy and in the manufacturing trade balance over the period 1990 to 1996; section IV presents econometric methodology used in the empirical work; section V examines the error-correction model for non-energy and manufacturing imports; section VI examines the possibility of hysteresis in imports through equation stability tests; section VII examines the corresponding model for non-energy and manufacturing exports and section VIII reviews the question of hysteresis in exports; section IX uses elasticity estimates from the economic estimation to shed light on the relationship between the trade balance and demand and competitiveness developments; section X presents simulation results for the non-energy and the manufacturing trade balance since the 1990s; and, finally, section XI presents conclusions. There are 8 annexes complementing the paper.II/511/97-ENOne of the striking characteristics of France's economic performance since the beginning of the present decade has been the strength of the external accounts. In particular, on the basis of national accounts data, since 1989 the current account and the non-energy trade balance have recorded rising surpluses, which in 1996 amounted to 1.7 % of GDP and to close to 1.5 % of GDP, respectively. The service balance, on the other hand, has registered persistent surpluses which averaged between 1 and 1.4 percent of GDP in the 1990s. The largest component of merchandise trade is trade in manufactured goods. The balance on manufacturing trade recorded surpluses throughout the period following the 1973 oil crisis to the late 1980s. The manufacturing trade balance slipped into deficit in the period 1987-1991 but subsequently moved into surplus which rose to almost 1 % of GDP in 1996. Graph 1 presents quarterly data on the evolution of these variables from the beginning of the 1970s to the end of 1996; data adjusted for inflation present a similar picture. It is clear that since movements in the current account are dominated by movements in the non-energy and, in particular, in the manufacturing trade balance throughout this period the sources of the current account improvement in the 1990s are likely to be those explaining the improvement of the manufacturing trade balance.Awareness of the importance of developments in France's external transactions became more pronounced following the commitment to sustain a stable franc in the ERM. External accounts deficits were considered as leading to devaluations and, consequently, exchange rate stability required that the trade balance was not systematically in deficit, in order not to undermine exchange and the stability. Since the dominant component of France's external transactions is trade in manufactures, the commitment to a stable franc inevitably implied the necessity to strengthen the manufacturing trade balance, principally through improvements in competitiveness. These took the form of cost and price restraint which has had a beneficial effect on export growth and on the manufacturing trade balance, and on supporting the external value of the franc.Graph 1 also shows the importance of manufacturing in France's external and, more specifically, in non-energy trade. Over much of the period since the beginning of the 1970s peaks and troughs in the former coincide with peaks and troughs in the latter, while the level of the manufacturing trade balance accounts on average for virtually the level of the non-energy trade balance. This relationship has been particularly close in the period up to the second half of the 1980s. Since then, a systematic deviation has emerged where the level of the manufacturing trade balance has been lower than the level of the non-energy trade balance. Furthermore, since 1987 improvements in the non-energy trade balance have been larger than those in trade in manufactures where notably larger deficits have been recorded until late 1991. Clearly, marked improvements in non-manufacturing, non-energy trade (that is, trade in agricultural and food commodities) are at the background of these developments. By 1996, the non-energy trade balance had registered surpluses amounting to over 1 percent of GDP while the manufacturing trade balance had recovered from a peak deficit of 0.7 percent of GDP recorded at the end of the 1980s and in the beginning of the 1990s to a surplus of 0.7 percent of GDP in the first three quarters of 1996. This improvement has taken place against a background of turbulence in the ERM marked by the substantial nominal and real depreciations of the exchange rate for the Italian lira, the Spanish peseta, the Portuguese escudo, and the British and the Irish pound against the French franc.There are three significant factors which have undoubtedly contributed to France's external performance in recent years. First, the different cyclical position of France relative to its main trading partners; secondly, relative price developments which have moved to France's advantage or disadvantage principally, but not exclusively, as a result of nominal and real exchange rate changes; and, third, supply improvements which have promoted export expansion and import substitution, principally through gains in cost and price competitiveness but also through improvements in non-price competitiveness associated with changing technology through new investment in the trading sectors of the economy, increased export capacity, productivity-induced relative price changes etc. The impact of the first two factors has likely dominated, especially in short-term developments, the latter's influence on France's trade. Ultimately, however, many supply-side improvements have undoubtedly themselves taken the form of improvements in France's relative costs and relative prices.The purpose of the present paper is to review the sources of France's trade surplus in recent years and to attribute trade balance movements strictly to those determinants of trade flows suggested by economic theory. These determinants are price and/or cost developments, and demand in France and in the rest of the world. Nominal exchange rate movements in the 1990s have been perceived as playing a significant role in France's trade performance, particularly during the depreciation episodes of 1992 and 1993, since they were considered to have imparted a competitive advantage to those trading partners whose currency had depreciated against the franc; ceteris paribus, and assuming that the nominal depreciation led to a real exchange depreciation, imports would increase and exports would decline, and the trade surplus in real terms would decline. This could have permanent effects on the trade balance since, according to some models of international trade, prolonged exchange rate appreciations, or depreciations can induce hysteresis phenomena (see Baldwin (1988), for example). At the same time, slow growth in France relative to the rest of the world in the 1990s would be expected to have led to a widening of the trade surplus. These two factors have a conflicting impact on trade balance movements, and since income elasticities are generally substantially larger than relative price elasticities it is possible to argue that the emergence of the trade surplus since the beginning of the 1990s is dominated by relative demand movements. A primary objective of the paper is to examine the empirical support for these propositions and to analyse the dynamics of adjustment of trade flows to changes in competitiveness and in relative demand. To do so, a cointegration/error-correction model is applied to flows of both imports and exports, and the estimates of key elasticities obtained are instrumental in shedding light on this question.The paper, in addition to the introduction, is organized as follows: Section II reviews some salient characteristics of France's trade in recent years in terms of trade patterns, price and cost competitiveness developments, import penetration and export market performance, and in terms of demand developments in France and abroad; section III discusses an accounting decomposition of movements in the non-energy and in the manufacturing trade balance over the period 1990 to 1996 according to the state of price competitiveness and of relative demand; section IV presents the econometric methodology used in the empirical work; section V examines the error-correction model for non-energy and manufacturing imports; section VI examines the possibility of hysteresis in imports through equation stability tests; section VII examines the corresponding model for non-energy and manufacturing exports and section VIII reviews the question of hysteresis in exports again through equation stability tests; section IX uses elasticity estimates from the econometric estimation to shed light on the relationship between the trade balance and demand and competitiveness developments; section X presents simulation results for the non-energy and the manufacturing trade balance since the beginning of the 1990s where the contribution of price competitiveness and of relative demand is evaluated; and, finally, section XI presents conclusions. There are eight annexes complementing the paper. The sources and the time series properties of the data are presented in Annex A; Annexes B, C and D present additional cointegration results and further evidence on the stability of the import equations; and Annexes E, F, G, and H are devoted to reviewing further cointegration results and to examining the stability of the export functions.trade analysis, french imports, french exports

Modeling Comovement among Emerging Stock Markets: The Case of Budapest and Istanbul

A double world index model is proposed as an ideal way of characterizing the comovement among emerging stock markets, and applied to Budapest-Istanbul as an interesting case. An exclusive increase in the correlation between Budapest and Istanbul during the recent crisis period is documented. To decompose this correlation into information dynamics, a structural vector autoregression (SVAR) model is employed which controls for global indices that enter the system exogenously. Istanbul and Budapest contain incremental information for each other after controlling for global factors, in particular during and after the recent global crisis. Impulse response results suggest significant lagged responses, which imply predictability. Istanbul appears to respond to global information faster.comovement of stock markets; European emerging markets; structural VAR; world index model

On the" mementum" of Meme Stocks

The meme stock phenomenon has yet to be explored. In this note, we provide evidence that these stocks display common stylized facts for the dynamics of price, trading volume, and social media activity. Using a regime-switching cointegration model, we identify the meme stock “mementum” which exhibits a different characterization compared to other stocks with high volumes of activity (persistent and not) on social media. Finally, we show that mementum is significant and positively related to the stock’s returns. Understanding these properties helps investors and market authorities in their decisions